What is a KPI and why are they so important?

Key Performance Indicators (KPIs) are the backbone of business. They are the used by managers, leaders, and executives to help them understand whether their business is on the right track for success, and, if it’s not,  more easily identify where to make improvements and focus more attention.

For public sector organisations, KPIs confirm standards they need to meet to gain budgets.

The aim of a KPI is to bring about improvement.

But with the amount of data that businesses and organisations generate, it is important to choose the right measures and indicators. With that in mind, KPIs must be aligned with the overall company strategy and objectives.

Get them right and business performance will improve.

Get them wrong and you can drive behavioural change that focuses on delivering results on a specific measurement that has no overall positive impact on the business.

But really, what is a KPI?

Firstly it’s critical to understand the difference between a measure, a metric, and a KPI. Just because you can measure it doesn’t make it a metric. And just because it is a metric, that doesn’t automatically make it a KPI.

But you do need to be able to measure it. And everybody within you organisation needs to measure it in the same way.

Converting Metrics into KPIs

The easiest way to understand a KPI is that they build on each other. KPIs derive from metrics, which are created out of measurements.

A measurement can be number of customers, number of sales, or total revenue. But until you start making comparisons, they are simply numbers.

A metric is typically a combination of two or more measures, so number of customers over time, or total revenue over time. Metrics illustrate whether the values are good or bad and can help with financial forecasting and bench-marking.

A metric becomes a KPI when it is put in the context of a particular organisation or industry. A KPI adds meat to the detail, so ratios and percentages often make better KPIs than just the number of things in a group.

What makes a good KPI, and how many should you have?

Overall, an organisation should have no more than 5-6 KPIs developed at an executive or leadership level, although each department will have their own.

KPIs give executives the chance to communicate the mission and focus of the organisation to investors, team members, and other stakeholders. As KPIs filter through the organisation, they must grab employees’ attention to make sure that everyone is moving together in the right direction and delivering value to the business.

Departments, and even individuals within an organisation, may have their own KPIs. But it is important that they understand the context of what they are being measured against and how it fits within the broader business strategy and goals.

The KPIs that a company or organisation measures will vary depending on the type of business and industry, its customers, and its staff. However, they are likely to include some of the following:

  • Net profit
  • Net Promoter Score
  • Customer engagement
  • Customer complaints
  • Market share
  • Share of voice
  • Carbon footprint
  • Supply chain miles
  • Waste recycling rate
  • Employee satisfaction
  • Staff churn
  • Return on investment (ROI)

Once you have defined your business’ goals and strategy, identifying and aligning the KPIs for your business will be much simpler.

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